It may be difficult for Walsh to assemble his core team.

Source: Jin Shi Data

Nick Timiraos, the chief economic reporter for The Wall Street Journal and known as the "Fed's mouthpiece," wrote that the results of the U.S. midterm elections have changed the power dynamics between the Trump administration and the Federal Reserve, providing the strongest counterbalance to Trump's efforts to control the Fed so far. After the Democratic Party took control of the Senate, they will gain a greater voice in federal appointments, being able to prevent Trump from placing more loyalists on the Federal Reserve Board.

Although Trump can appoint the chosen Kevin Walsh as the chairman of the Federal Reserve, he still lacks one supporter to achieve a majority on the seven-member board. The prospects for securing that seat have clearly narrowed now.

The Trump-led White House has posed the most direct challenge to the Fed's independence in decades, including an unprecedented attempt to dismiss current board members. Previously, checks on Trump mainly came from several fronts: a retiring Republican senator obstructing Fed personnel nominations; Jerome Powell deciding to remain on the board after stepping down as chairman; and a court temporarily allowing Fed board member Lisa Cook to continue her duties.

With the Democratic Party in control of the Senate, these scattered checks will form a broader institutional constraint. During the remainder of Trump's term, the Democrats will be able to exercise veto power over all personnel nominations to the seven-member Federal Reserve board.

Investment manager Mark Spindel, who studies the relationship between the Federal Reserve and Congress and co-authored related works, believes that Trump's plan to reshape the relationship between the Fed and the White House has faced significant setbacks. "It was obviously declared dead last Tuesday," Spindel said.

He further stated, "He can no longer get his people into the board, nor can he fill the politically-colored board seats. This matter ends here."

Personnel appointments blocked, Trump struggles to control the Federal Reserve Board

Currently, Trump has appointed three of the seven Fed board members, including Walsh. According to the existing arrangement, the next board vacancy will come from Powell, whose term as a board member lasts until January 2028.

Trump also attempted to create a new board vacancy by dismissing Cook on the grounds of alleged mortgage fraud. Cook denied the allegations, and the White House plans to hold a hearing on the matter in December.

The U.S. Supreme Court ruled in June that Cook can continue to serve during her legal challenge to the dismissal decision. Even if Trump ultimately wins in court, the Democrat-controlled Senate might still refuse to confirm a successor, leaving that seat vacant for an extended period.

Democrats have previously collectively opposed Trump's nominated Fed officials multiple times. Last year, when Michelle Bowman was nominated to be the Vice Chair for Supervision at the Federal Reserve, not a single Democratic senator voted in favor.

Months later, Stephen Miran was nominated to fill a vacant Fed board seat but similarly did not gain support from Democrats. In May of this year, when Trump nominated Walsh to be the chairman of the Federal Reserve, only one Democrat supported him, Pennsylvania Senator John Fetterman.

If Democrats continue to obstruct Trump's personnel nominations, his ability to change the Fed's policy direction through appointments will be restricted. The president's main avenue to influence the Fed's monetary policy has always been through personnel appointments.

Trump has never hidden his desire to lower interest rates, but the U.S. president does not have the authority to directly decide interest rates. Interest rate decisions are discussed and made by a committee composed of Fed officials, most of whom are not appointed by the president.

The Federal Open Market Committee (FOMC) involves 19 officials in policy discussions, but only 12 have voting rights at each meeting. This includes seven Federal Reserve board members appointed by the president, the president of the New York Fed, and four of the chairmen of the other 11 regional Feds. These four seats are held by non-political appointees and participate in voting on a rotating basis.

Currently, Trump appointees hold only three of the 12 voting seats.

As inflation returns to be a focus of monetary policy, the actual policy direction of the Fed under Walsh contrasts with Trump's desired path of interest rate cuts. The Fed raised rates for the first time since 2023 in September and kept rates unchanged last month. Investors now expect the Fed to raise rates again in December.

Trump blames this situation on what he calls a "politicized" board, believing that board members harbor hostility toward Walsh. Cook was one of the two officials who supported raising rates and cast a dissenting vote last month.

However, a single dissenting vote has limited impact on FOMC decisions. Miran was a senior economic advisor in the White House appointed to the Fed board by Trump. Before stepping down in May, he attended six meetings and consistently supported adopting a more accommodative monetary policy, but only once gained the support of another official with the same stance.

Walsh's reform plan faces internal resistance

With the Democrats controlling the Senate, their influence on Walsh is not only in limiting Trump's increase of board seats but may also make it difficult for him to select his core aides.

Timiraos wrote that Walsh hopes to completely reform the Fed's external communication methods, economic assessment mechanisms, and balance sheet management strategies. But if the White House cannot reach an agreement with Senate Democrats, these reforms will rely on Walsh persuading existing board members.

The current board includes three members appointed by former President Biden, as well as Walsh's predecessor Powell. These members were not chosen by Walsh.

Monetary policy often depends on how the Fed chairman guides the committee's middle ground and promotes consensus among members. Previous Fed chairs typically relied on their core aides, whom they participated in selecting, to consolidate policy positions and drive decisions.

Since taking office in 2006, Ben Bernanke quickly welcomed Walsh and Frederic Mishkin to the board. At that time, Walsh assisted Bernanke in advancing the nomination confirmation process, while Mishkin was a co-author of Bernanke's research on inflation target systems.

In 2014, veteran central banker Stanley Fischer became Janet Yellen's deputy months after she took over as Fed chair. In 2018, Powell also actively worked behind the scenes to ensure that he could appoint Richard Clarida, who aligned with his positions, as vice chairman.

Timiraos noted in the article that with the Democrats controlling the Senate, they will also have a say in the selection of the person to replace Philip Jefferson as vice chairman of the Federal Reserve in September next year. Even if Trump nominates a current Fed board member, it still must be confirmed by the Senate. Bowman underwent the same process when she was promoted to vice chairman last year.

Derek Tang, an economist at Monetary Policy Analytics, stated that past Fed chairs have relied on "a very strong vice chairman" to help them sort out their personal policy ideas and push the committee toward consensus.

He believes that, for Walsh, "this path does indeed seem to have narrowed."

However, even without new board members, Walsh still has room to influence the Fed's operations. As the chairman of the Fed, he can decide the agenda for board meetings and can impact the arrangements for senior Fed staff.

In his first five months in office, Walsh has already shortened the duration of press conferences and announced a reduction in the number of meetings to set interest rates starting next year.

Timiraos wrote that in the areas of bank regulation and payment systems, related decisions are made solely by the Federal Reserve Board. The direct impact of the Democrats controlling the Senate on these policies may be relatively limited since the board rarely passes significant regulatory rules by a narrow margin of 4 to 3.

However, if Trump cannot appoint a fourth board member, Bowman's efforts to ease capital requirements for large banks, as well as measures to open the Fed payment system to non-bank entities, may require support from a Democrat-appointed board member to pass.

Additionally, whether Powell or other current board members will choose to leave the board early remains an unresolved issue. The key is whether they believe the Fed's customary institutional arrangements are sufficient to safeguard the central bank's independence.

In April of this year, Powell admitted that his decision to remain on the board after his term as chairman ended was unusual. He expressed a desire for the Fed and the executive branch to "return to a state of respecting legal provisions and consistent practices, which allows the Fed to act according to its responsibilities."